mindchanging politics

Despite weak economic growth and dim forecasts for more robust growth in the future, large corporations are taking advantage of weak sales and declining profits to make big on mergers and acquisitions. This week the boards of both American Airlines and U.S. Airways approved an $11 billion merger that has been in the works for almost two years while American has sought bankruptcy protection after losing over $12 billion over the last decade.

Analysts say mega-mergers like the one by the two airlines are back in vogue for some very specific reasons. First, the climate of fiscal austerity after the financial collapse led to firms downsizing and laying off thousands of workers. As a result Fortune 500 companies are now sitting on $1 trillion in cash reserves that are being used to make big plans for a period of future growth.

In addition, credit and finance appears to be on healthier footing than the last few years as banks and lending institutions begin to lend again. Also, private equity firms are once again bargain shopping after  consolidating their credit lines and divesting themselves of toxic holdings.

Finally, financial analysts and investors are cautiously looking to the future in which a period of growth will mean expansion and larger shares of profit. The 500 stock index of the S&P reached its highest levels since 2007 signaling to investors that the time for growth is coming and encouraging companies to go bargain shopping for other firms.

When combined together these different factors are behind the mega-mergers. For example, Dell Computers announced last week as well that it was planning a $24 billion buyout by owner Michael Dell in order to take the company private again. Also, Virgin Media announced a $16 billion acquisition deal by media mogul John Malone for Liberty Global.

The new wave of mega-mergers brings with it mixed results, however. Mergers and acquisitions always lead to downsizing and layoffs, which cripples effective demand further during recessions. Moreover, the promise of improved products and better deals for consumers almost never turn out to be accurate. Profits are the primary concern of such large commercial transactions, and as its been the case historically with other large airline mergers, lower airfares will not be forthcoming.

This week the Justice Department announced a civil lawsuit against the credit rating agency Standard & Poor’s after a lengthy investigation. The suit alleges that the agency issued faulty credit ratings for securities tied to the “toxic assets” of mortgages and other financial instruments. The Justice Department claims that S&P’s purposely engaged in fraud by diluting their rating standards in order to generate business and accommodate long-standing clients.

The suit is being brought under a law passed in 1989 after the savings and loan crisis. The statutes in the Financial Institutions Reform, Recovery, and Enforcement Act make it easier to prosecute fraud cases against financial institutions. Since the case is civil it only requires the plaintiffs to show by a preponderance of evidence that S&P engaged in fraudulent activity such as giving subprime mortgages inflated credit ratings during the financial crisis. For example, the company rated numerous mortgage-backed securities highly, only to downgrade those same the securities quickly, leading to massive defaults in the final few months of 2007.

Then there is the usual array of inappropriate e-mails and text messages. One riffs on the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” Another e-mail from an analyst in response to a question about how his new job was going reads: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.”

The complaint also included numerous emails from executives at the agency that Justice Department officials claim are proof that they knowingly inflated credit ratings and engaged in misconduct by deceiving investors. However, critics see a weakness in their case as other credit ratings agencies have not been sued, and since many of their ratings were the same as S&P’s, it is unclear whether executives will be able to say that they followed the lead of other third-party agencies such as Fitch and Moody’s. Given the industry-wide pattern of misinformation and risky behavior, the Justice Department’s suit is an important step in rectifying the egregious abuses of executives and companies in the financial world.

The U.S. economy contracted by a fraction of a percent in the final quarter of last year, catching investors off guard. According to a Commerce Department report released yesterday GDP contracted by .01 percent at the end of 2012, the weakest economic report since the second quarter of 2009. The report cites declining military spending and exports as some of the many reasons for decline. In addition, the political impasse in Washington over the “fiscal cliff” was blamed for frustrating investment.

Some information in the report was cited to dispel concerns about a return to recession. For example, investment in residential housing jumped 15.3 percent, and equipment and software purchases by businesses rose 12.4 percent. However, the 22.2 percent drop in military spending is the single largest drop in 40 years represents a significant amount of federal spending, and that decline alone helped push the last quarter into negative growth. Along with a decline in the consumer confidence index this month  news of negative growth sent stocks down this morning, though the market rallied later.

With unemployment remaining at 7.8 percent and forecasts for growth reigning back estimates for the first quarter of 2013, Congress and President Obama will have to achieve a more fair process that leads to more stable budgeting. The so-called “fiscal cliff” cannot be resolved unless Republicans compromise on a sensible tax plan and Democrats stand their ground on further austerity cuts. Although a balance has to be struck between taxes and spending, the report clearly shows that declines in government spending directly contribute to slow growth. This is because spending cuts are more likely than not to undermine effective demand further and frustrate solid growth.

The failure of Congress to make substantial economic reform is nowhere more visible than in the present hysteria regarding the “fiscal cliff” and its consequences for the federal budget and American economy.

House Speaker John Boehner (R-OH) and Republicans have painted themselves into an awkward corner. They are unwilling to raise taxes on anyone, anywhere thanks to Grover Norquists’s anti-tax pledge and Tea Party extremism, but automatic rate increases and spending cuts are set to kick in once the Bush tax cut extension expires on the first of the New Year. This unwillingness to bend is an ideological straight-jacket that may lead them to break their pledge, all without casting a single vote.

The failure to reach a compromise with the more moderate Senate and President Obama means that Republicans are effectively going to raise taxes on all Americans including its most vulnerable citizens. What does this mean in financial terms?

• The poorest Americans making less than $20,000 a year would  have to pay more to the IRS. The average increase would be $590—a significant sum for low-income earners.
• Those earning more than $40,000 a year would also be significantly affected with tax hikes averaging about $1200.
• Those earning between $40,000 and $64,000 annually would see an average increase of nearly $2,000.
• Those earning $108,000 or more also face an increase of nearly $13,000.

Not only will rates increase—immediately effecting payroll taxes and decreasing the daily earnings of American workers, potentially undermining effective demand and triggering another recession—automatic spending cuts will set in, leading to reductions in basic social services that are also essential for the most vulnerable Americans. Unfortunately, we live in a time of political extremism with an opposition party that has stated it wants to “shrink” the federal government. (Since metaphors are all the rage in politics these days, it is important to point out that “shrink” means “wreck” here.)

The metaphor of the the “fiscal cliff” has been thrown out haphazardly— scaring investors, dragging down markets, and creating unwarranted fear. The damage of going over the cliff is unknown in terms of the long-term financial viability of the federal government paying its debt obligations, but the real damage is to average American workers who will take home less income, shoulder more than their fair share in tax revenue, and pay more out-of-pocket expenses for everything ranging from food to health care.

The statutory tax increases and spending cuts basically do what Congress is supposed to do in the first place, however. The inability of Republicans to compromise on the budget has led to a legislative impasse that the “fiscal cliff” resolves in extreme terms. In short, the automatic hikes and cuts does the job of politicians for them, but the form it takes will hurt real American workers and initiate a new wave of political cynicism about government in this country.

Michigan lawmakers began debate today on controversial “right to work” legislation that would forbid requiring workers to pay union dues. The legislation is expected to pass despite widespread protests in and around the state capital. If it passes MI will be  the 24th state with such laws that limit union participation as a condition of employment.

Two years ago Wisconsin Republican Governor Scott Walker proposed other controversial legislation limiting the bargaining power of public employee unions as a cost-cutting measure. The measure passed despite opposition from both unions and the public, but Walker was punished for it in a brutal recall election he barely survived. Similar legislation failed to pass in Ohio a year later as anti-union sentiment continues to thrive in a difficult economic climate.

So-called “right to work” legislation is anything but employment guarantees and workplace protections. In fact, by diluting the power of unions to maintain “closed shops” with employers, such legislation actually diminishes the individual and collective voice rights in labor contracts, making it easier for employers to pay weak wages, provide little benefits, and terminate employees on demand.

The recent movement to pass “right to work” laws has been backed by corporate and industry lobbying efforts in conjunction with the Republican Party and groups such as the National Right to Work Legal Defense Foundation. The wisdom of such legislation is questionable in the long run as the wages of American workers continue to decline and the cost of employment benefits are increasingly placed on the shoulders of employees. In the short term support for this misnamed legislation has received a boost from calls for austerity against big government. However, it isn’t big government spending that is to blame for the sluggish economic recovery, but declining revenues tied to a tax base that has significantly shrunk in the wake of the recession.

Once again it appears that workers with good paying jobs will pay the price of corporate and political corruption, and unfortunately many Americans are helping to destroy these jobs by backing right-wing policies against workers‘ rights.

In a shake up last month Citi’s executive board ousted its former CEO Vikram Pandit, paving the way for today’s announcement that the country’s second largest bank would cut 11,000 jobs in exchange for a $1 billion charge. The bank has been slow to bounce back from the recession despite cutting its workforce by 33 percent since 2007.

Dozens of fast food workers at some of the country’s largest chains, including McDonald’s, Taco Bell, and Domino’s, walked off the job today in a coordinated campaign to highlight low wages and encourage unionization. The campaign is backed by community groups, civil rights groups, religious leaders, and a labor union, the Service Employees International Union.

Workers are protesting what they said are low wages and retaliation against those workers who have backed unionization among the thousands of fast food worker in New York City. Coordinators claim this is the first multi-restaurant strike by fast food workers in American history, and promised further action as unions make in-roads into the traditionally anti-union fast food industry.

Over the decades there have been efforts to unionize single fast-food restaurants or chains, but there has never before been an effort to unionize multiple restaurants at one time. The new campaign states advocates raising low wages and reducing the disparities of income inequality.

CUNY sociology professor Ruth Milkman said, “These jobs have extremely high turnover, so by the time you get around to organizing folks, they’re not on the job anymore.”

Hostess announced Tuesday night that it failed to reach a new agreement with BCTWGM, and union officials said the company plans to proceed with shuttering its operations after 82 years in business.

18,500 workers will lose their jobs overnight, adding more grist to the grind of the  jobless recovery. Today’s announcement came four days after the company announced that its liquidation, which many observers believed was all but assured by the union’s strike.

The firm filed for bankruptcy last January because its labor costs were unsustainable and that it needed to cut its wage, health and pension costs to continue operating—despite the questionable practice of paying executives gross compensation packages for an otherwise struggling company.

Today in New York a judge for the Federal Bankruptcy Court all-but-ordered mediation between Hostess Brands and the Bakery, Confectionary, Tobacco Workers and Grain Millers Union (BCTGM) in an effort to avoid the demise of the company and one of it quintessential American snack brands, the Twinkie.

In January, the company filed for Chapter 11 bankruptcy protection for a second time, nearly three years after emerging from an earlier stint. The company said it could not meet its debt obligations during the first round of bankruptcy, but BCTGM and the Teamsters were furious that the company continued to pay executives exorbitant compensation while demanding major concessions from them. The company then offered a contract to workers of BCTGM with an eight percent pay cut for bakers and a 32 percent reduction of benefits, while its CEO was given a 300 percent raise above his basic compensation.

In this new round of contract negotiations financial disclosures revealed the company gave its top nine executives 60 to 100 percent raises, even though the company stopped paying its pension obligations to workers. The Teamsters agreed to more steep concessions but the workers of BCTGM refused, citing the egregious abuse of company executives as key factor of its fiduciary problems. When the union refused to accept an additional $100 million in cost concessions, the company’s management announced it was ending operations and liquidating its assets.

Today’s announcement by Judge Robert Drain effectively puts those plans on hold as mediation takes place between management and BCTGM. Although the union refused steeper cuts, the Teamsters agreed to more cuts in their last round of contract negotiations, adding pressure to all parties to come to an agreement and avoid the dissolution of the company.

Note:  The average Teamsters driver makes $20 an hour, and the average baker makes $16, while the compensation of the company’s top executives ranges in the tens of millions. Over 18,000 middle-class workers are on the verge of destitution, while company executives remain insulated from financial hardship.

There is very little oversight of executive compensation in this country, but there is a growing awareness that insolvent companies regularly pay executives exorbitant and unjustified compensation packages that are unlinked from their financial performance. The question is whether Congress has the political will to regulate this form of economic transaction that increases wealth inequality and hampers long-term economic performance. This is doubtful as Congress is increasingly the coordinating committee for an unregulated and predatory form of capitalism that simultaneously encourages wealth maximization and wealth inequality.

The most expensive election campaign in U.S. history came to an end yesterday. According to FEC and independent estimates over $4 billion was spent in the race between President Obama and former Gov. Mitt Romney. Although the race appeared to be tight, and in the final days appeared to be a dead heat, in the end the electoral map barely changed and Obama was swept into power with 303 electoral college votes and a much slimmer margin of victory by popular vote. (This morning Florida’s 29 electoral college votes are still undecided as counting continues in that state. The race is very close there with Obama ahead by a mere .07 of a percent.)

The balance of power in Washington remained largely the same despite the large sums of money thrown into this race by individuals, parties, and Super PACs alike. Democrats picked up 1 additional seat in the Senate and 2 additional seats in the House. The President returns for a second term to confront the political gridlock that stymied efforts in his first term to pass a comprehensive jobs bill and financial regulation. The country is poised to dip back into recession as growth slows, revenues drop, job creation remains slack, and the soaring deficit run amok. To avoid another financial cliff more compromise by the Republican Party will be needed, but whether it can get beyond its vicious anti-Obama sentiments in order to do the hard work of governing remains to be seen. It is, in fact, doubtful given its track record during the President’s first term.

In other electoral results the news for progressive politics was largely great. The night was a major political victory for the Constitution and gay and lesbian politics. In Wisconsin, Rep. Tammy Baldwin defeated former governor Tommy Thompson by a decent margin, making her the first lesbian elected to the U.S. Senate. Voters in Maryland and Maine voted to legalize same-sex marriage, while voters in Minnesota rejected a constitutional ban on same-sex marriage. Referendum 74 to legalize same-sex marriage in the state of Washington was ahead in the polls, and with King County still tallying its ballots the measure will most likely pass. These important votes in four states represents a water-shed moment for the equality movement because they are the first time states have voted to uphold rather than deny the constitutional rights of gay and lesbian citizens. Minds really do change.

The election was also an important victory to bring the senseless and costly war on marijuana to an end. Voters in Washington and Colorado voted to legalize recreational use of the drug. Although a similar measure failed in Oregon, this represents a direct challenge to the federal government by states to change its drug policy. Recent backlash against medical marijuana users by the DEA in California and other states is a case in point why the federal law needs to change to accommodate states’ rights.

Here in California, several important initiatives passed. Voters passed Prop 30 to raise taxes on the wealthiest Californians and temporarily increase sales taxes in order to avoid otherwise devastating cuts to education. Although Prop 34 to eliminate the death penalty did not pass, it was by a narrow margin (53 to 47 percent), signaling the public’s shifting mood on capital punishment. In a victory for criminal justice Prop 36 to reform the state’s draconian “3 strikes” law passed by a wide margin, and this victory should bring some relief to an overcrowded prison system filled with non-violent offenders. Finally, the State Assembly is approaching Democratic supermajorities in both houses, which may help alleviate the state’s governance and budget problems.

In the end, American voters rejected Republican lies that deregulation and less taxes on the wealthy is the solution to a slow economic recovery. Across the nation, voters who were concerned about unemployment voted for Democrats by a significant margin. Perhaps people did not easily forget that 4 years ago the recession swept across America because of, not in spite of, those same policies. The question remains whether President Obama and Congress can get the job done and bring the economy back with healthy, sustainable growth. In the meantime, this victory of progress over the forces of reaction will almost certainly go down in the history books as a vindication of the hard work Obama has done bringing the country back from economic ruin and a crucial turning point in American politics.